Presentation on theme: "BUILDING A COMPETITIVE AFGHAN CARPET VALUE CHAIN THROUGH INFORMED STRATEGY AND PRODUCTIVE ATTITUDES ROB HENNING, OTF GROUP RHENNING@OTFGROUP.COM DECEMBER."— Presentation transcript:
1 BUILDING A COMPETITIVE AFGHAN CARPET VALUE CHAIN THROUGH INFORMED STRATEGY AND PRODUCTIVE ATTITUDES ROB HENNING, OTF GROUPDECEMBER 14, 2006
2 GLOBAL VALUE CHAIN: AFGHAN CARPETS Global Enabling EnvironmentNational Enabling EnvironmentLocal & regional banks, MFIs, hawalaDesignTransport & logistics, BDS, IT providers, insuranceWeaversWool, dye & chemical providersNational RetailersExportersInt’l RetailersTradersFinishing (Cut & Wash)Int’l Wholesalers80% of finishing takes place in Pakistan and locally sold carpets are shipped BACK to Afghanistan
3 OTF GROUP 5 STEP STRATEGY FORMULATION PROCESS Situation AnalysisStep 2Step 3Step 4Step 5Carpet Industry GoalsUnderstand Carpet Buyers’ NeedsArticulate Afghan Carpet Market PositioningDevelop Action GuidelinesResearch and AnalysisCluster Mobilization
4 AGENDAMOBILIZATION – THE ROLE OF ATTITUDESRESEARCH, ANALYSIS AND INSIGHTS
5 THE ROLE OF PAKISTAN IN AFGHANISTAN’S CARPET VALUE CHAIN Building the Afghan value chain depends on capturing more of the value in production and trade that is currently occurring in Pakistan. In an insecure investment climate, the importance of mobility increases. Some elements of the value chain are more mobile than others.Partial financing from PakistanWool from Pakistan and GhazniProduction in AfghanistanDesigns from PakistanSale to US & EU from PakistanTransportation to foreign marketsC&W in PakistanMobility: HighSimple C&W facility but requires transportation of chemicals. Climate offers some restraints.Mobility: MediumMarket demand linkages take time to be develop, though they can be accelerated through aggressive research.Majority has moved from Pakistan over only 3 year periodReliable global transportation links are difficult to develop, but alternatives exist.Mobility: LowBusiness networks are mobile, but take time to develop.Access to financing can be developed in the near term, but a trusted banking system will take longer.Wool production is increasing and imports can fill current gaps
6 Distribution of Responses (1 to 7scale) ATTITUDES AND BELIEFS OF AFGHANISTAN’S CARPET SECTOR: AREAS OF DIVERGENCEThere are mixed feelings about the importance of Pakistani partners with regard to the future of the Afghan carpet sectorDistribution of Responses (1 to 7scale)MeanSurvey QuestionAgree (5-7)Disagree (1-3)Neutral (4)I cannot imagine replacing the role played by Pakistani carpet traders in the next 3-5 yearsThe current success of my business is dependant on the role played by Pakistani carpet traders; for now I cannot do without them
7 Imam at Domotex – Germany 2006 Haji Zabibullah at work ATTITUDES AND BELIEFS OF AFGHANISTAN’S CARPET SECTOR: NEW VS. OLD WAYImam at Domotex – Germany 2006Haji Zabibullah at workin AndkhoyPhotos by Aref Adamali, OTF Group.
8 AGENDAMOBILIZATION – THE ROLE OF ATTITUDESRESEARCH, ANALYSIS AND INSIGHTS
9 INTERNATIONAL CARPET MARKET: TOP IMPORTING COUNTRIES The US and Germany are by far the largest buyers, with the US passing Germany in Shrinking between , the carpet market is rebounding towards its peak in 1999.Value of Imports: Global Total and Top-5 Importers, (US$, millions)The largest carpet market in 1998, Germany has rapidly declined, falling to half its 1998 level in The market has turned around since, growing at 7% between ; however, Germany is no longer likely to be as dominant a buyer as it once was.The US market has been the only market to maintain a positive growth rate, averaging 6% between (driven mainly by high growth pre-2001). However, like other countries, the US market also took a downturn, though not as dramatically. The market picked up to grow at 3% betweenDespite a strong housing market, building up to a 21 year housing starts record in Jan (NAHB), carpet sales have declined. However, most traders expect 2005 to be a stronger year.Source: USAID Trade Map
10 INTERNATIONAL CARPET MARKET: THE US MARKET India has dominated US carpet imports for the past 10 years, doubling its sales. China has since 2000 lost market share to Iran. Though still a comparatively small player, Nepal experienced impressive growth.Value of US Imports from Top 5 Supplying Countries, (US$, millions)Growth,IND3%IRNPAK13%CHN-17%NPLALL4%534530509482487488422372288241After years of double digit growth to a peak in 2000, US imports stagnated with the to the post-dotcom recession.However, the market is showing signs of strong recovery, approaching its 2000 peak in looks to be a strong year, with total first quarter imports 15% higher than the same period in 2005.Unlike India and China, Pakistan was not as adversely affected by Iran’s re-entry to the US. This implies that its exports to the US – both traditional Afghan and Chob Rung carpets – cater to a different niche from pure Persian and Indo/Sino-Persian carpets. It has also grown well inTakeaway:Clearly an attractive market, the US is also very competitive. Afghanistan should avoid entering price sensitive segments that Iran, India and China serve.GrowthStagnationRevivalSource: US International Trade Commission
11 INTERNATIONAL CARPET MARKET: AVOIDING THE “MOVE TO THE MIDDLE” “We’re getting competition that we didn’t get before from machine mades.” - -US ImporterMajor manufacturers and distributors are increasingly turning towards becoming ‘one-stop shops’, stocking both tradition/oriental and modern designs, as well as machine-made and handmade carpets.As machine weaving technologies improve, there is decreasing differentiation in the market between mid-range hand-knotted and good quality machine-made carpets.Example of machine-made oriental carpet“And what about hand-knotted rugs versus machine-made rugs? The fact is, there are rugs of extraordinary quality made both ways, and there are rugs of highly inferior quality made both ways … While a 6' by 9' rug can vary in price from $59 to $10,000 or even more, the general rule of thumb is that you get what you pay for. … And even among the very highest-priced, highest-quality handmade rugs in the world, most Karastan rugs can hold their own in terms of beauty and luxury feel.” – Karastan, Top 5 carpet producer in US.While avoiding direct competition with China, India and Iran, Afghanistan will have to also differentiate its products from machine made carpets, against which it cannot compete on cost or certain elements of quality.“A major trend in product construction has been the melding of handmade and machine-made sensibilities. In the major middle-market price points of $600 to $1,500 for 6' x 9' rugs, the method of production is now less important than the way the product is styled and colored … Price points for handknotted, hand-tufted and power-loomed products regularly intersect.”- National Floor Trends Magazine, March 20016’ X 9’ rug:Machine made - $400Hand tufted - $600Handmade (India) - $1000.(NFT:Example of handmade oriental carpet
12 INTERNATIONAL CARPET MARKET: CHANGING TRENDS Styles and colors are also changing more rapidly. While niches for traditional carpets are affected less by this, the opportunities for growth and volume may lie in serving ‘trendy’ – but more volatile – markets.The market for high quality, traditional Afghan carpets is more stable. However, it has been marred by a limited range of designs and colors, as well as poor qualityThere may be good growth opportunities around ‘soft contemporary’ designs, such as Nepali/Tibetan carpets (which experienced over 250% import growth into the US between 1995 and 2004).It is unlikely that the Afghan carpets sector will be able to rely fully on the traditional carpet niche. Serving larger markets will require considerable customer understanding and the ability to forecast and respond to rapidly changing trends in design and colors.(such as the use of non-fast chemical dyes and unevenness of carpet and borders).Chob Rung designs – also referred to tea washed/stained – have done well over the past 10 years, but may be nearing the end of their cycle. Kabul-based producers of Chob Rung carpets surveyed by OTF reported an average decline in sales of 25% over the past few years.Examples of ‘soft contemporary’ carpetsSource: OTF research; 1. National Floor Trends Magazine, April 2002.
13 UNDERSTANDING BUYER NEEDS: PRODUCT ATTRIBUTES, OVERVIEW Color, design, type of fiber, and price are the most important product attributes in both the USA and Germany. Country of origin, quality guarantees, environmental and labor issues matter the least.Most important product attributesRanked according to average of both countries(1= Not important; 5 = Very important)Respondent rating (scale 1-5)Product certification quotes“About certification: museum, government, etc. certification of an Oriental rug would be regarded as a colossal joke by anyone in the trade … we all know, you can get a rug certified … for a bit of baksheesh. Nobody believes what rug sellers say, anyhow...”“… Certain retail buyers care about … child labor … we try, but that does not in any way eliminate child labor. At least, we can say we are trying. Work on that bit, and don't fool about with quality certifications.”Despite commonality in many areas (highlighted in diagram), there are some important differences between the US and German markets:Size is the 3rd most important attribute in the US, but 9th in Germany.Quality of weave ranks 5th in Germany, but 9th in the US.Durability ranks 6th in Germany, but 9th in the US.It is common in the US for identical carpets to be produced in many different sizes, referred to as ‘programmed carpets.’ They are therefore sold not as unique products, but as standardized interiors items.Germany’s emphasis on weave and uniformity, as opposed to size, indicates that oriental carpets are still purchased as original artisanal products, valued for the quality of the workmanship. However, this is changing: “Carpets are becoming more of a fashion good and are not regarded as a traditional good anymore.” –Wholesaler, GermanyThe product’s aesthetics, quality of inputs, and value should form the foundations of a national carpet brand.Brand attributes Not relevant Highly relevant
14 UNDERSTANDING BUYER NEEDS: PRODUCT ATTRIBUTES, COLOR & DESIGN Earth or natural tones are popular in both the US and Germany, as are contemporary designs and simple floral patterns.Color attributes (1 = Not important; 5 = Very important)US marketProduct implications:Kazakhs and Chobis in natural dyes would do well.There is an untapped opportunity in earthy contemporary designs, such as Gabbehs.Intricate Kashmiri-type carpets are unlikely to be popular.German marketChobis in natural dyes would do well.There is an untapped opportunity in contemporary carpets, in both bright colors and earth tones.CommonalityDivergenceRespondent rating (scale 1-5)Both markets rate intricate floral carpets low, while differing considerably in their rating of bright colors.Respondents rate earth/natural tones highly.Bright colors come in last.Tribal designs and both contemporary and simple florals are highly rated, while intricate floral designs do badly.Afghanistan needs to maintain its production of good quality Chob Rung carpets, while developing capacity to enter the contemporary design segment through increased market learning.Respondents rate earth/natural tones highly, like the US.But in contrast to the US, bright colors are by far the most popular.Both contemporary and simple florals are highly rated, while intricate floral designs do badly. Tribal designs come somewhere in the middle.Design attributes (1 = Not important; 5 = Very important)Respondent rating (scale 1-5)
15 UNDERSTANDING BUYER NEEDS: OPERATIONS, BUYER REQUIREMENTS Supplier reliability and ease of transaction are what matter most to buyers. Suppliers need not concern themselves with elements such as marketing, inventory or insurance management.Operational prioritiesRanked according to average of both countries(1= Not important; 5 = Very important)What matters to buyers“Customer Quotes”“Reliability of producer is very important – [a] long-term trustworthy relationship is key.” – Wholesaler/Retailer, Germany“Quality of materials, honesty and reliability of supplier.” – Retailer, USA“The trustworthiness of the supplier and his understanding of the US market in terms of colors and designs.” – Wholesaler, USA“Good quality and design; reliability of the producer; adequate realization of [a] given order.” – Wholesaler, Germany“Protection of a contractor's designs [is important]. If I develop a design, I don't want it pirated … which is common amongst Afghan weavers.” – Wholesaler/Retailer, USAThere is no substitute for being an honest, reliable producer. However, much is also dependent on the enabling environment, in terms of transportation, banking and communication facilities.
16 UNDERSTANDING BUYER NEEDS: OPERATIONS, SOURCING CHANNELS Almost half of US buyers commission their carpets. However, Americans are also less willing to travel to Afghanistan to source carpets than German buyers.Willingness to travel to Afghanistan to source carpetsAbout 70% of respondents source their carpets direct from producers, with the balance buying from wholesalers in the supplier country.Trade magazines and on-line sources are rated among the most common source of new carpet supplier contacts. Trade shows do not feature highly.Commissioning versus buying ready-madeReluctance of American buyers to travel to Afghanistan is problematic – particularly because they commission almost half of their carpets. Building their comfort with visiting Afghanistan will be key to capturing their business.There is considerable reluctance by American buyers to even entertain the idea of sourcing carpets directly from Afghanistan.In contrast, over 60% of buyers from Germany say that they are willing to travel to Afghanistan to buy carpets.
17 MARKET POSITIONING: BUYER PERCEPTIONS OF SUPPLIER COUNTRIES India and Nepal enjoy strong reputations among buyers, with Iran coming in third. However, there are substantial differences in perception between markets.Which country comes closest to being your ideal carpet supplier? (Percent of total respondents in each market)Nepal is rated very highly in Germany, but comes in 5th out of 8 in the US.There is a substantial gap between India’s reputation and the second strongest, China, in the US.Afghanistan rates poorly as a supplier. The challenge lies in addressing this, while an opportunity exits in that Afghanistan is still a little known exporter.Afghanistan rates very low. This may in part be accounted for by limited buyer familiarity with Afghanistan (due to limited exports in comparison to other major producers).11. OTF discussion with buyers in the USA revealed limited knowledge of Afghan carpet production, other than traditional varieties from pre-conflict era.
18 MARKET POSITIONING: INDIAN CARPET CLUSTER Different cities have different areas of specialization. Bhadoi is the main carpet producing center, producing the widest range of carpets, with the largest production facilities.Kashmir“For your exquisite silk carpets.” 1Intricate silk carpets.Jaipur*“City of innovative styles. Medium and high qualities.”Hand-knotted carpets.Panipat*“For your contemporary fashion oriented tufted.”Almost exclusively tufted carpets, both traditional and contemporary designs.Agra“City of natural vegetable dyes for recreation of your antique pieces”Majority of production is hand-knotted.Bhadoi*“Great … for your cheaper yet fashion oriented hand-tufted, Indo-Tibetan and great hand-knotted of low & high qualities.”A ‘cluster’ in the truest sense, with over 80% of the town’s activities somehow related to carpets.1Little made-to-order production (due to long turn-around time).Supply constraints reported.Approximately 10-15% are from high-twist, hand-spun wool, using what is referred to as ‘Ghazni wool’.Considered to produce lower knot count products.* Research and site visits conducted by OTF in this production center (and surrounding area); June Estimate by cluster members. 1. Quotations from web site of the Carpet Export Promotion Council, 2. Some producers claimed to use actual Ghazni wool; others said it was unlikely to be from Ghazni.
19 MARKET POSITIONING: INDIAN CARPET VALUE CHAIN, TRANSFORMING TRADITIONAL DESIGN India does not restrict itself to traditionally Indian designs, but is quick to adopt and adapt designs from different parts of the world, creating interesting and potentially saleable products in the process.The top carpet is an older carpet – a classic Turkmen-Afghan carpet in traditional colors. Below is a new Turkmen-Afghan design, woven in India, with the use of more contemporary colors.1A traditionally Afghan motif (above), often used as a secondary ‘gul’ on Suleman designs, is incorporated into a flat-weave kilim in more contemporary colors (right).Note on carpet on left:1. This is Kilim2. Different use of colors3. Secondary gul used inside primary fil pai.Producers recently noticed that there is a good market for ‘antique-look’ carpets – Chob rungs and Zigglers. They are therefore now producing them, using a high twist Ghazni wool and a natural dye effect.1. Quotation by US carpet wholesaler/retailer: “[Afghanistan requires] more emphasis on contemporary designs and colors geared toward fashion. Red and blue are losing ground.”
20 MARKET POSITIONING: AFGHANISTAN’S POTENTIAL TRAJECTORY, AVOIDING THE “MOVE TO THE MIDDLE” India is moving to the middle of the market, competing on a mix of design innovation & cost. Afghanistan is unlikely able to compete against India in these two areas in the near term. At the same time, China may be redrawing the cost axis of the productivity frontier.ExcellentCostPoorDifferentiationIntense competition in the low-cost, low differentiation quadrant makes it unattractiveIndiaChinaAfghanistanChild labor: Became big issue for India in 1995, and now children are seldom used (though some may be in Jaipur). This is particularly true for tufting, which requires an adult to work the tool.Brand: Indians stressed Iran’s brand as its key advantage (not the quality of Persian carpets). In this regard, India has an edge over China (more exotic).Institutional capacity: All Indian carpets go out with specifications on inputs, etc.Afghanistan cannot succeed in the near term with a cost-focused strategy. This requires it focus on differentiation as the basis of its competitive position.The Indian carpet industry is a dynamic and innovative competitor – many years ahead of Afghanistan.Competition is also further increasing with the introduction of good machine-made carpets from China, which may be pushing out the productivity frontier.The weak business environment in Afghanistan is less supportive of efficient production than many other countries, therefore cannot support a low cost strategy.1This forces the strategic choice that the Afghan carpet industry can make, precluding businesses from pursuing a low-cost strategy as the base of their competitive advantage.1. For example, according to the World Bank, Pakistan has ten times more road coverage than Afghanistan, and India has 30 times that number.
21 ACTION AND INVESTMENT PLAN: REQUIRED PRODUCTION TO SERVE NEW CUSTOMERS Investment efforts will focus on production for direct to end-market sales. The latter will require investing in a local cut and wash sector, as well as greater spending on design and marketing.TOTALNPV1 of industry cash flow$84.8 MTotal investment$83.8 MShare of total export value ($, millions)368334Integrated production facility5% volume growthNPV1 of IPV cashflow$31.5 MInvestment$48.2 MPrice assumption22 times302273245219Export value ($, millions)194This will come from a combination of new capacity of IPFs and redirecting current DPN capacity towards end-markets.Note: DPN models require less investment by business owners because looms are housed by weavers. Business owners in effect pass down investment costs (land and buildings) to workers, despite them being less able to bear such costs.174Distributed production network10% volume ‘conversion’NPV1 of upgraded DPN cashflow$45.6 MInvestment$35.6 MPrice assumption21.5 times1581461. NPV discount rate of 20%. Total NPV includes all production; separate DPN NPV is only for cashflow of upgraded capacity. 2. Multiple of current export sale price to regional buyers.
22 THANK YOU. Please visit www. microlinks THANK YOU! Please visit for seminar presentations and papersROB HENNINGDecember 14, 2006
23 Annex: Complete 5 Step Process To be distributed as a handout
24 OTF GROUP 5 STEP STRATEGY FORMULATION PROCESS Situation AnalysisCarpet Industry GoalsUnderstand Carpet Buyers’ NeedsArticulate Afghan Carpet Market PositioningDevelop Action GuidelinesExport value estimated at >$140 MMarket: Increasingly competitive with top 5 buyers accounting for 70% of demand; prices moving downwardDomestic bottlenecks: Cutting and washing, access to finance, transportation, market knowledge and linkageDifferentiation: Important to build strong brand based on quality productsGrow industry export value at 11% annually; total export value of >$350 M by 2015Grow volume 5%>80% of exports cut and washed in Afghanistan and sold direct to end-markets by 2015Develop new productsIncrease productivity and raise wagesIncrease local wool use from 33% to 65%Brand identity: product’s aesthetics, quality of inputs, and valueSize matters more in the US; weave and price more in GermanyAfghanistan is well positioned with hand-knotted, naturally dyed carpets, such as Chob Rung carpetsContemporary design market is an untapped opportunityAfghanistan should pursue a differentiation-based strategyThis will require concerted focus on developing a quality product (design, inputs, value) and fostering reliable, high-trust relations with buyersA strong brand will be required to support this differentiation; labor issues will likely be importantAfghanistan will likely pursue two production models: an Integrated Production Facility (IPF) and a Distributed Production Network (DPN)Total NPV of 10 year industry cash flow $84.8 M; required investment of $83.8 MPublic financing will be required to support market access, design diversification, and maintenance of industry leadership institutionsAnalytical AgendaForm and engage private-public industry leadership group, the Afghanistan Carpet CommitteeAgree on a working schedule with Carpet CommitteeIdentify core industry members of groups as well as subject matter expertsBuild sense of shared vision within industryInitiate issue-specific working groupsForm a research plan based on initial hypothesesLeverage OTF Insight to conduct international carpet market researchUse competitor findings to stimulate discussion around priority areas within industry groupInvolve all subject matter experts in clarifying potential issuesEngage Afghanistan Carpet Committee in process of strategy vetting, buy-in and implementationLead a campaign to inform all stakeholders of strategy implicationInstitutional Process